This comes on the back of an article I, wrote last week. The theme was that Uber and Ola are not focused on creating a profitable business. This argument was proposed and commented on in-depth. The key argument was that in order to drive user adoption at prices 30% lower than the current market, these companies are stuck with driver subsidies that will leach away any efficiencies from scale. An attempt to reduce driver earnings would result in loss of service and attrition.

Not something you wish for? But the direction was predicted on March 5th, 2018 and will roll out March 19. 2018. Uber comment is classic funny,” Uber spokesperson termed the strike call as a speculative.”

Looks like a shift to an ownership model is imminent

Ola and Uber are not able to realise economies of scale as they don’t own the key deliverable cars and drivers. Look at the challenges ahead of them. Cost of driving an Uber X or Mini (diesel self-owned and financed car with commercial license without driver wages for an average of Rs 150 km a day). Let call this

Direct production cost

12.6 km without a driver

15 per km with driver

18 per km to profit with driver

Billing per km average

Rs 15 (includes free movement for pickup)

Uber | Ola earning per km – 25%

Rs 3.75 per km

Uber | Ola driver incentive subsidy

Rs 3 -5 per km

Which cost can Uber | Ola crunch and maintain billings at current rates of Rs 15/- per km

Cost break up pertains to Mumbai market and is a back of an envelope calculation

The only cost it can crunch is the cost of ownership. Rs 4.2 per km. They should buy out all the cars and temp-hire at Rs 4 per km. Currently, all their subsidies are going to pay EMI with no asset creation. Also with their scale, they can drive the cost of car ownership to Rs 2/- or 3/- per km and create an asset. In any case, both companies are well funded and do not need an asset-light model. That’s why I think the change of ownership is imminent

Conclusion: Ola | Uber cannot continue with an asset-light model without inflating billings. To maintain they will have to attack cost of ownership and take on asset creation

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Founder Arvindra Consulting. Arvindra has been a serial intrepreneur and entrepreneur. He launched several ventures for Unilever India, Sony Pictures UK and ZEEL India. He was among the first internet entrepreneurs and founded India.com in 1999. To know more http://www.arvindrakanwal.com/